Speech by SEC Commissioner:
"Rules Alone Will Not Stop Obfuscation of the Balance Sheet"

by

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
September 17, 2010

Investors and the public at large have too often been kept in the dark about liquidity and financing through short-term borrowings, in some cases because of affirmative accounting and disclosure shenanigans. Today's actions are a step toward improved disclosures related to important financing activity and a company's liquidity. I support today's recommendations from the staff and join the other Commissioners in thanking them for their work.

It is important, however, to highlight that while improved rules will help, creating more extensive disclosure rules will not necessarily address a serious problem. Over the past decade or so, we have seen repeated efforts by insiders to make a company's balance sheet look more attractive than it actually is. The options backdating scandals, for example, were driven by a desire to hide compensation expenses. The scandals at Enron and many other companies during the 1990s were driven by efforts to hide losses and create the appearance of increasing profitability. In addition, there has been an explosion of financial engineering designed to avoid taxes, and avoid accounting, disclosure, and other regulations.

Individuals and entities will always have incentives to dress up the balance sheet and to look for the new "Repo 105." The question remains — how does our regulatory oversight regime counter these incentives? What are the consequences for those who dress up balance sheets? There should be serious consequences that everyone can see. Rules on the books are not enough — they have to be enforced. Otherwise, the Commission will always be approving new rules after the latest crisis rather than overseeing a regime that works prophylactically to prevent the crisis in the first place. Incentives through prophylactic principles and strong enforcement should emphasize that one should run a business to create value rather than run a business focused on reporting numbers.

The lesson is that rules have not been enough to end attempts to dress up the balance sheet. It is essential to accompany principles and rules with tough enforcement to change inappropriate incentives and to protect investors and the American public.